Deck 18: Integrated Audits of Public Companies

Question 1

Which of the following is a weakness in internal control that allows a reasonable possibility that a significant (but less than material)misstatement may occur and not be detected?

A)Control deficiency.
B)Material weakness.
C)Reportable material item.
D)Significant deficiency.

Answer 1

D

Question 2

A client imposed scope limitation relating to the audit of internal control ordinarily results in a qualified report.

Answer 2

False

Question 3

The Sarbanes-Oxley Act shifted a majority of the responsibility for maintaining internal control from management to the auditors.

Answer 3

False

Question 4

PCAOB standards suggest that auditors emphasize nonroutine transactions as contrasted to routine transactions in their consideration of internal control.

Question 5

Section 404 of the Sarbanes-Oxley Act of 2002 includes internal control reporting requirements for both management and auditors.

Question 6

Walk-throughs provide evidence that helps the auditor to:
$\begin{array} { c c c } & \text {Evaluate design effectiveness of } & \text { Confirm whether controls have been placed } \\&\text {controls}&\text { in operation }\\ \end{array}$
A- $\begin{array} { c c c } \quad\quad\quad\quad\quad \quad\quad\quad\text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { Yes } \\\end{array}$
B- $\begin{array} { c c c }\quad\quad\quad\quad\quad\quad\quad\quad \text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { No } \\\end{array}$
C- $\begin{array} { c c c } \quad\quad\quad\quad\quad\quad\quad\quad\text { No } & \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text {Yes } \\\end{array}$
D- $\begin{array} { c c c }\quad\quad\quad\quad\quad\quad\quad\quad \text { No } &\quad\quad\quad\quad \quad\quad\quad\quad\quad\quad\quad\quad\quad\text { No }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 7

A material weakness that exists at year-end will result in what type of audit report on internal control?

A)Adverse.
B)Qualified.
C)Unqualified.
D)Unqualified with explanatory language.

Question 8

Tests of operating effectiveness ordinarily include reperformance of the application of controls.

Question 9

Which must the auditor communicate to management?
$\begin{array} { c c c } & \text {Known Material Weaknesses} & \text { Known Significant Deficiencies } \\\end{array}$
A- $\begin{array} { c c c } \quad\quad\quad\text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { Yes } \\\end{array}$
B- $\begin{array} { c c c }\quad\quad\quad \text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { No } \\\end{array}$
C- $\begin{array} { c c c } \quad\quad\quad\text { No } & \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text {Yes } \\\end{array}$
D- $\begin{array} { c c c }\quad\quad\quad \text { No } &\quad\quad\quad\quad \quad\quad\quad\quad\quad\quad\quad\quad\quad\text { No }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 10

The PCAOB emphasizes the importance of controls,such as establishing antifraud programs.

Question 11

If management's report on internal control discloses a material weakness,the auditors (who agree that it is a material weakness)will issue a report that includes an adverse opinion.

Question 12

Which must management communicate to the audit committee?
$\begin{array} { c c c } & \text {Known Material Weakn?esses} & \text { Known Significant Deficiencies } \\\end{array}$
A- $\begin{array} { c c c } \quad\quad\quad\text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { Yes } \\\end{array}$
B- $\begin{array} { c c c }\quad\quad\quad \text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { No } \\\end{array}$
C- $\begin{array} { c c c } \quad\quad\quad\text { No } & \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text {Yes } \\\end{array}$
D- $\begin{array} { c c c }\quad\quad\quad \text { No } &\quad\quad\quad\quad \quad\quad\quad\quad\quad\quad\quad\quad\quad\text { No }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 13

The amount involved with a significant deficiency is at least a material amount.

Question 14

The framework most likely to be used by the client in its internal control assessment is the:

A)COSO internal control framework.
B)COSO enterprise risk management framework.
C)FASB 37 internal control definitional framework.
D)AICPA internal control analysis manager.

Question 15

Walk-throughs provide the auditors with evidence to:
$\begin{array} { c c c } & \text {Confirm their understanding effectiveness of } & \text { Substantiate account balance } \\&\text {controls}\\ \end{array}$
A- $\begin{array} { c c c } \quad\quad\quad\quad\quad \quad\quad\quad\text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { Yes } \\\end{array}$
B- $\begin{array} { c c c }\quad\quad\quad\quad\quad\quad\quad\quad \text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { No } \\\end{array}$
C- $\begin{array} { c c c } \quad\quad\quad\quad\quad\quad\quad\quad\text { No } & \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text {Yes } \\\end{array}$
D- $\begin{array} { c c c }\quad\quad\quad\quad\quad\quad\quad\quad \text { No } &\quad\quad\quad\quad \quad\quad\quad\quad\quad\quad\quad\quad\quad\text { No }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 16

Assume that an auditor is focusing on two weaknesses in internal control.Although neither is by itself a material weakness,the two significant deficiencies in combination represent a material weakness.The client effectively remediates one of them prior to year-end but does not have time to remediate the other prior to year-end.What type of audit report on internal control is appropriate?

A)Adverse.
B)Qualified.
C)Unqualified.
D)Unqualified with explanatory language.

Question 17

The "as of date" for internal control reporting is ordinarily the last day of the fiscal year.

Question 18

According to PCAOB standards,determining the allowance for doubtful accounts is referred to as a(n):

A)Substantive transaction.
B)Routine transaction.
C)Nonroutine transaction.
D)Accounting estimate transaction.

Question 19

An auditor's report on internal control ordinarily includes negative assurance on the effectiveness of internal control.

Question 20

Which of the following is most likely to be considered a material weakness in internal control?

A)Immaterial fraud committed by senior management.
B)Restatement of previously issued financial statements due to a change in accounting principles.
C)Inadequate controls over non-systematic transactions.
D)Weaknesses in risk assessment.

Question 21

A material weakness caused by ineffective oversight of the external financial reporting function by the audit committee will ordinarily result in communication to:  
$\begin{array} { c c c } & \quad\quad\quad \mathrm{PCAOB} & \text {The Stock Exchange That } \\&& \text {the Company is Listed On}\\\end{array}$
A- $\begin{array} { c c c } \quad\quad\quad\text { Yes } &\quad\quad\quad\quad \text { Yes } \\\end{array}$
B- $\begin{array} { c c c }\quad\quad\quad \text { Yes } &\quad\quad\quad\quad \text { No } \\\end{array}$
C- $\begin{array} { c c c } \quad\quad\quad\text { No } & \quad\quad\quad\quad\text {Yes } \\\end{array}$
D- $\begin{array} { c c c }\quad\quad\quad \text { No } &\quad\quad\quad\quad \text { No }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 22

Which of the following fits most directly under the control activities components of the COSO IC framework?

A)Company-level controls dealing with tone at the top.
B)Overall methods for assigning authority and responsibility.
C)The control environment.
D)Ensuring that cash disbursements are authorized by appropriate personnel.

Question 23

Under PCAOB internal control reporting standards,what are the auditor's communication requirements to the audit committee with respect to material weaknesses?

A)All must be communicated in written form.
B)All must be communicated in written form or orally.
C)Only those that violate the Foreign Corrupt Practices Act need to be communicated,but in written form.
D)Only those that violate the Foreign Corrupt Practices Act need to be communicated,in written form or orally.

Question 24

A control deficiency that is less than a significant deficiency is most likely to result in what form of audit opinion on internal control?

A)Adverse.
B)Qualified.
C)Unqualified.
D)Unqualified with explanatory language.

Question 25

Which of the following must be included in management's report internal control under section 404 of the Sarbanes-Oxley Act of 2002?

A)It is management's responsibility to eliminate or publicly report on significant deficiencies in internal control.
B)A detailed description of the COSO criteria.
C)Management's assessment of the operating effectiveness for the period from the beginning to the end of the fiscal year under audit.
D)Identification of the framework used for evaluating internal control.

Question 26

Based on PCAOB standards for an internal control audit,which of the following is least likely to indicate a significant deficiency relating to a client's antifraud programs?

A)No program for anonymous submissions of alleged fraud.
B)Audit committee's active engagement in discussions on the topic of fraud.
C)Senior management delegates to lower levels responsibility for oversight of antifraud programs.
D)Lack of audit committee interaction with the internal audit department.

Question 27

An auditor identified a significant deficiency in internal control in December.The client was informed and the client corrected the significant deficiency shortly before year-end (December 31);the auditor agrees that the correction eliminated the significant deficiency as of December 31.The appropriate audit report on internal control under a PCAOB Standard No.5 audit of internal control is:

A)Adverse.
B)Unqualified.
C)Unqualified with explanatory language relating to the significant deficiency.
D)Qualified.

Question 28

Which of the following would most likely be included in a SEC 10K filing in which a material weakness in internal control exists?  
$\begin{array} { c c c } & \text {Financial Statement:Audit Report} & \text { Internal Control Audit Report} \\\end{array}$
A- $\begin{array} { c c c } \quad\quad\quad\text { Unqualified } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { Adverse} \\\end{array}$
B- $\begin{array} { c c c }\quad\quad\quad \text { Unqualified } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { Qualified } \\\end{array}$
C- $\begin{array} { c c c } \quad\quad\quad\text { Qualified } & \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text {Qualified } \\\end{array}$
D- $\begin{array} { c c c }\quad\quad\quad \text { Adverse} &\quad\quad\quad\quad \quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Unqualified } \end{array}$

 

A)Option A
B)Option B
C)Option C
D)Option D

Question 29

Which of the following is a strong indicator that a material weakness in internal control exists?

A)Restatement of previously issued financial statements to reflect a correction.
B)Inadequate controls over non-routine transactions.
C)Inadequate controls over the period-end financial reporting process.
D)Weaknesses in a control activity.

Question 30

An auditor identified a material weakness in internal control in December.The client was informed and the client corrected the material weakness shortly after year-end (December 31);the auditor agrees that the correction eliminated the material weakness as of January 31.The appropriate audit report on internal control under PCAOB standards on reporting on internal control is:

A)Adverse.
B)Unqualified.
C)Unqualified with explanatory language relating to the material weakness.
D)Qualified.

Question 31

A material weakness involves a reasonable possibility that what size misstatement will not be prevented or detected?

A)Immaterial.
B)Material.
C)More than inconsequential.
D)Substantial.

Question 32

Consider a company whose sales are initiated by customers either through the Internet or in a retail store.Which of the following is correct?

A)These types of sales represent two major classes of transactions within the sales process.
B)These types of sales represent two sales processes within a major evaluation processing cycle.
C)These sales represent a sales assertion on completeness.
D)These events represent nonroutine transactions that must be investigated in detail.

Question 33

A circumstance caused scope limitation in a Sarbanes-Oxley 404 internal control audit is most likely to result in a(n):

A)Withdrawal from the engagement.
B)Disclaimer of opinion.
C)Unqualified opinion with explanatory language.
D)All of these are equally likely.

Question 34

The minimum likelihood of loss involved in the consideration of a possible significant deficiency is:

A)Remote.
B)Reasonably possible.
C)Probable.
D)Not considered.

Question 35

An auditor identified a material weakness in internal control in August.The client was informed and the client corrected the material weakness prior to year-end (December 31);the auditor agrees that the correction eliminated the material weakness prior to year-end.The appropriate audit report on internal control under PCAOB standards on reporting on internal control is:

A)Adverse.
B)Unqualified.
C)Disclaimer.
D)Qualified.

Question 36

According to PCAOB standards for reporting on internal control,performing the LIFO calculation or adjusting investments to fair value is referred to as:

A)Substantive transactions.
B)Routine transactions.
C)Nonroutine transactions.
D)Accounting Estimate transactions.

Question 37

Which is least likely to be a question asked of employee personnel during a walk-through?

A)Have you ever been asked to override the process?
B)Have you assessed the operating effectiveness of the system?
C)What do you do when you find an error?
D)What are you looking for to determine if there is an error?

Question 38

The minimum likelihood of loss involved in the consideration of a control deficiency that is less than a significant deficiency is:

A)Remote.
B)More than remote.
C)Probable.
D)Not considered.

Question 39

Deficiencies in internal control identified by the auditor that are lesser than significant deficiencies:

A)Must be communicated to the board of directors,the audit committee,and management.
B)Must be reported to the audit committee and management.
C)Must be communicated to management,and the audit committee need only be informed of the communication to management.
D)Need not be disclosed unless they in aggregate equal (at least)a significant deficiency.

Question 40

The minimum likelihood of loss involved in the consideration of a possible material weakness is:

A)Remote.
B)Reasonably possible.
C)Probable.
D)Not considered.

Question 41

The SEC reporting requirement that a public company prepare a report in which it acknowledges its responsibility for establishing and maintaining accurate internal control and to assess internal control effectiveness in general applies to which companies?

A)Only public companies controlled by foreign investors.
B)Public companies with a market capitalization in excess of $75,000,000.
C)All public nonfinancial companies.
D)All public companies.

Question 42

The PCAOB has outlined a number of circumstances that are indicators of a material weakness.In addition,other control deficiencies may or may not be a material weakness depending upon details of the circumstances involved.Categorize the following:

Question 43

Which of the following is an accurate statement about internal control weaknesses?

A)Material weaknesses are also control deficiencies.
B)Significant deficiencies are also material weaknesses.
C)Control deficiencies are also material weaknesses.
D)All control deficiencies must be communicated to the audit committee.

Question 44

An unqualified public company audit report on a client's internal control over financial reporting which is not combined with the audit report on the financial statements is least likely to include which of the following sections?

A)Opinion.
B)Critical audit matters.
C)Basis for opinion.
D)The definition and limitations of internal control over financial reporting.

Question 45

An unqualified public company audit report on a client's internal control over financial reporting which is not combined with the audit report on the financial statements is most likely to include which of the following sections?

A)Auditor's responsibility.
B)Basis for opinion.
C)Management's responsibility.
D)Consistency paragraph.

Question 46

Which of the following best describes a CPA's engagement to report on a public entity's internal control over financial reporting?

A)An engagement to form an opinion on the effectiveness of internal control.
B)An audit engagement to provide negative assurance on the entity's internal control.
C)A consulting engagement to provide constructive advice.
D)A prospective engagement to project internal control for the next year.

Question 47

Which public companies does Section 404(b)of the Sarbanes-Oxley Act of 2002 require to obtain an audit of their internal control over financial reporting?

A)Only public companies controlled by foreign investors.
B)Public companies with a market capitalization in excess of $75,000,000.
C)All public nonfinancial companies.
D)All public companies.

Question 48

The existence of a material weakness led to an adverse opinion in the internal control audit report of a publicly traded company.Which of the following statements is correct if management believes that it has remediated the weakness?

A)Management may engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit.
B)Management is required to engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit.
C)Management may not engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit.
D)Management may engage the auditors to modify the prior adverse audit report be modified to an unqualified report.

Question 49

An audit firm has been engaged to report on whether a material weakness that previously resulted in an adverse opinion on internal control has been remediated.Which of the following statements is correct?

A)A significant scope limitation on the auditor's procedures results in a qualified opinion or an adverse opinion.
B)If there has been an auditor change,the successor auditor may issue such a report.
C)If while performing the engagement another material weakness is identified,it will result in an adverse opinion relating to the current engagement to report upon the other material weakness.
D)The engagement may only take place at year-end during the next year's audit of internal control.